When buying or selling farm properties understanding the GST/HST obligations before the transaction closes can help avoid potential misunderstandings or costly errors. Given the significant value of farm properties as well as rising land prices, the potential sales tax impact is often material. Vendors and purchasers should ensure they understand the tax implications before signing the deal.
While most sales of used residential housing are exempt from GST/HST, commercial real property (i.e., land and buildings) is generally taxable, including farmland. However, GST/HST exemptions may apply to farmland under certain circumstances, such as land sold by an individual to a relative or to the vendor's former spouse or common-law partner, where specific conditions are met.
Most people understand that GST/HST can apply to the farm if the vendor is registered, but it can also apply when the vendor is not registered. How the property is used prior to the sale factors into the application of GST/HST. Typically the vendor determines the tax status of the property and must consider several factors, including:
- Whether the property was used in a business or commercial activity, which includes not only farming but other activities such as renting the farm
- If the property was subdivided or severed during the time the vendor owned the property
- Whether GST/HST on capital costs, such as barns or wells, has been refunded as input tax credits
If the sale is deemed taxable, the GST/HST registration status of the buyer will determine whether the vendor is required to collect GST/HST on the sale. If the buyer is a GST/HST registrant, the vendor does not need to collect GST/HST on the sale of taxable real property. Instead, the buyer must self-assess and report GST/HST on the acquisition of the property. They may offset the amount of GST/HST payable with an input tax credit, to the extent the property is acquired for use in commercial activities, such as farming.
The purchase and sale agreement and/or closing documents should include details and statements from the vendor to enable the registered buyer to determine the GST/HST obligations on closing.
However, if the purchaser of taxable commercial real property is not registered, the purchaser will likely be required to pay GST/HST to the vendor. To mitigate this costly cash flow tie up, a purchaser that intends to use the property for commercial activities, such as farming, may want to consider tax-planning strategies such as registering for GST/HST before the purchase. By registering in advance of the purchase, the GST/HST is not payable to the vendor on closing and instead, allows the purchaser to take advantage of the same self-assessment and input tax credit relief mechanism noted above.
In some cases the buyer may be able to recover all or part of the GST/HST incurred on the property if the buyer pays GST/HST on the acquisition of property and subsequently registers for GST/HST. However, this can only happen after becoming registered and will likely undergo scrutiny by the Canada Revenue Agency as part of its Refund Integrity Review program.
The application of tax is further complicated where the real property includes both a residential portion (i.e., a house) and a non-residential portion such as farmland. In that case, each portion must be considered separately for GST/HST purposes. The residential portion of the property may qualify for exemption whereas the commercial portion may be considered to be a separate sale for GST/HST purposes, with tax applying to the commercial portion where certain conditions are met.
If you are selling or purchasing property, contact a member of BDO Canada's national Indirect Tax team to prevent overpaying GST/HST.
Kurt Oelschlagel, Tax Partner and National Agriculture Tax Leader
Glen Cassidy, Senior Manager, Indirect Tax